Will the IRS Really Forgive Most of My Tax Debt?

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Bankruptcy Basics Consumer Debt Personal Finance

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Posted by: National Bankruptcy Forum

IRS Debt ForgivenessHave you seen those TV ads where the announcer promises those deep in tax debt that they only need to call, and the company can wave a magic wand and get you a deal where you pay the IRS back pennies on the dollar? If you have a tax lien, or if your debt to the IRS has become a matter of public record in some other way, you may suddenly find yourself the target of an avalanche of direct mail and even phone calls from national scam companies. They may make promises of IRS forgiveness, take your money, and virtually disappear.

But as with any good con, there is a very solid grain of truth at the center. If you meet the IRS’s criteria, a good tax lawyer may be able to get you a deal where you pay only part of what you owe the IRS. The process is called Offer in Compromise. And if you qualify, you may have a substantial part of your tax burden lifted from your shoulders — so you can breathe again.

3 Reasons the IRS May Accept an Offer in Compromise

Though some would argue, the truth is that the IRS is not in the business of harassing people. They want to collect what is owed to them, but if that is impossible to do, they are willing to make a deal with you to get whatever is practically possible. You have a lot of options, but if the IRS approves your Offer in Compromise, you can pay what is agreed to and the IRS will write off the rest.

There are three reasons the IRS may approve an Offer in Compromise.

  • Doubt of Collectability: You have convinced the IRS that you don’t have the assets or income to pay the debt owed, and they would rather get something than nothing and move on.
  • Doubt as to Liability: In some cases, there is a doubt whether you really owe the debt. If that doubt is strong enough, you may be able to settle. If you have already gone to court with the IRS over the issue and lost, however, this is not a possibility.
  • Effective Tax Administration: The IRS will consider exceptional circumstances. If you can demonstrate it would cause you extreme hardship to pay the full amount, the IRS may forgive a lot of your debt.

See also: Debt Settlement Tax Consequences: 3 Rules to Remember

Offers in Compromise are Complex

Preparing an Offer in Compromise so it is accepted by the IRS requires complex analysis of the taxpayer’s individual situation, calculations, logical explanations, submission of extensive financial information, and completion of detailed forms. The Offer in Compromise is reviewed at many levels within the IRS before it is approved or declined.

Offers in Compromise are declined about 40% of the time. This is sometimes because the taxpayer never met the necessary criteria and should not have gone to the expense of making an Offer in Compromise to begin with. In other situations, the Offer was not drafted correctly with the required painstaking detail by a competent tax attorney experienced in the area.

One of the issues that requires a tax attorney to have a great deal of experience is determining how much to offer to the IRS. You don’t want to offer more than you must, but if you offer too little, the IRS will not approve your Offer in Compromise. It takes an experienced tax lawyer to determine what is the lowest acceptable offer and whether you even qualify.

More Things You Should Know about Offer in Compromise

If the IRS approves your Offer in Compromise, they won’t want to dilly-dally. You must pay the amount over a short period of time, if not immediately.

When you submit your Offer in Compromise, you must accompany your submission with 20% of the amount you owe the IRS, along with the $186 application fee. You won’t see it again no matter the outcome. Penalties and interest also continue to mount while you are trying to get your Offer in Compromise approved. It can take up to a couple of years.

The amount the IRS will accept varies dramatically from case to case. Your tax attorney can advise you about your situation. Some people do only pay a fraction of what they owe the IRS. But that is not always true.

If you are not happy with the decision of the IRS, you or your attorney may appeal within 30 days.

If you are in bankruptcy, you cannot submit an Offer in Compromise. Tax debts are not dischargeable in bankruptcy; however, if you have other debts such as credit card bills that may have led you to putting off your tax bill, bankruptcy may be able to help. For more on whether or not an Offer in Compromise can even help you avoid bankruptcy, check out this post.

Is Offer in Compromise for you?

You can find the IRS’s pre-qualifier for Offer in Compromise on its website, but the only way to know if Offer in Compromise is your best option or if you should follow another path is to consult with a competent tax attorney. Be aware that if you hand your money to a national scam company, you will probably only talk with salespeople and your case will probably never be seen by an attorney. In fact, some of these companies do nothing at all.

Instead, look for a local, experienced tax attorney with an office you can visit and sit down to discuss your circumstances. If Offer in Compromise is not for you, your attorney will have some other options for you to consider rather than wasting your time and money.